Banks May Face Tougher Basel Risk-Concentration Limits

Global regulators are seeking to
toughen curbs on how much business large global banks can do
with each other as part of a push to prevent lenders from
keeping risks too concentrated.

A “key lesson from the crisis is that material losses in
one systemically important financial institution can trigger
concerns about the solvency of other SIFIs, with potentially
catastrophic consequences for global financial stability,” the
Basel Committee on Banking Supervision said today in a statement
on its website.

The group said it wants input on how to strengthen so-
called large-exposure limits that force banks to diversity the
range of companies and other lenders they work with. The Basel
group is drafting updated risk concentration limits as part of a
third wave of measures to overhaul bank rulebooks since the
financial crisis that followed the collapse of Lehman Brothers
Holdings Inc.

The world’s 101 biggest banks would have needed an extra
208.2 billion euros ($268 billion) to meet post-Lehman capital
rules drawn up by the Basel group, had the standards been
enforced in June 2012, the committee said earlier this month.
The measures, known as Basel III, are scheduled to fully take
effect in 2019.

Under today’s proposals, a bank identified by regulators as
being of global systemic importance should be prevented from
investing an amount equivalent to more than 15 percent of its
core capital in transactions with another bank of similar size
and importance.

Single Counterparty

The plans would add to existing Basel guidance that the
amount of business a bank can do with a single counterparty
should be capped at no more than 25 percent of its capital.

“The appropriate large exposure limit” between two lenders
important to the global financial system “should be between 10
percent and 15 percent of the eligible capital base,” the Basel
group said. “A limit that is tighter than the general limit
would reduce the risk of contagion.”

The Basel committee brings together regulators from 27
nations, including the U.S., U.K. and China, to coordinate rules
for banks.

Work on the updated large exposure rules will be completed
by the end of 2014, Stefan Ingves, the Basel committee’s
chairman, said earlier this month.